Dividend Defense: 3 Recession-Proof Utility Stocks to Snag Before They Surge

Rick Orford - Barchart - Fri Feb 2, 7:10AM CST

2023's recession fears may have already been a thing of the past, but 2024 is still haunted by the effects of the Fed's interest rate decisions that could ultimately end up with a hard landing for the economy. While I admit that this sounds remote, it also opens up an opportunity to add a sprinkle of safety for the time being, like dividend stocks.

Dividend stocks offer protection during uncertain times because they often reward investors with stable income. Necessary commodities companies like those in electricity, gas, and water make excellent choices. The sector's most bullish case is simply the nature of the business having to abide by strict regulations and the fact that not anyone can set up shop. This puts some companies in a position to own the market. So, if you're looking for a little portfolio protection, here are three utility stocks to consider buying.

Entergy Corporation (ETR)

Entergy Corporation is a utility company operating as an electric power producer and retail distributor. The company has two main segments: Entergy Wholesale Commodities for electric power plants and decommissioning of nuclear power plants operations; Utility segment for operations that include the generation up to sale of electric power and natural gas utility service in several states, including Mississippi, Texas, Arkansas, and Louisiana. With the recent news on Amazon Web Services’ historic $10 billion investment plan in Mississippi, ETR is set to provide reliable and affordable power to the state.

Entergy Corporation’s latest finances indicated solid results, with earnings up 18.89%. Its 2023 adjusted EPS guidance range was then updated to $6.65 to $6.85, highlighting its strong confidence in meeting its full-year performance targets. In addition, regulatory bodies like SERI and the APSC have concluded agreements with the company to help with the firm's regulatory progress on complaints and reduce risks. ETR has taken strategic initiatives to meet sustainability goals by partnering with significant partners like Lotte Chemical USA Corporation. As a result of the company's strong earnings performance and positive outlook position, we think it's one of the top utility stocks to buy today.

As of yesterday's close, ETR's dividend yield works out to 4.26%.

American Water Works Company, Inc. (AWK)

American Water Works Company, Inc. is a utility company that specializes in water and wastewater services. The company serves commercial, residential, industrial, and public authority customers. Its operations are done under a single business segment: the regulated business segment provides services on 18 military stations and 14 states, which includes Georgia, Iowa, Virginia, and Indiana.

AWL's latest financials revealed promising results, with year-to-date 2023 EPS improving by 8.92% YoY. Despite last year's inflation headwinds, the company benefited from new rates in its Regulated Businesses, allowing for additional capital and acquisition investments. AWK maintained its EPS guidance for 2023 at $4.72 to $4.82 and 2024 at $5.10 to $5.20, with a CAGR of 7-9% for EPS and dividends. Speaking of which, AWL pays a quarterly dividend of $0.695/share, which works out to a yield of 2.22% as of yesterday's close. Dividend growth investors will note the company has steadily increased its dividends for the last 16 years, highlighting its potential as a strong long-term stock.

Wrapping it up, American Water Works is a strong choice for utility stocks due to its stable operations, consistent profit growth, and dividend income.

Vistra Corp. (VST)

Last but not least on our list of utility stocks is Vistra Corp., a utility company operating as an electric power generation and retail business.

Operations are divided into six segments:

Texas segment for its electricity generation operations in the ERCOT market;
Retail segment for sales of natural gas and electricity industrial, commercial, residential, and small business;
East segment for electricity generation for ISO-NE, PJM, and NYISO markets;
Sunset segment for generation plants with announced retirement plans;
West segment for electricity generation operations in the CAISO market; and
Decommissioning and reclamation of retired plants and mines operations for its asset closure segment.

Vistra’s latest financials boasted a strong quarter, with its ongoing operations adjusted EBITDA growing 55.10% from the year-ago quarter. Its liquidity was $4.42 billion, ready to support its operations and other initiatives. The company has also started taking steps to ensure that it is evolving with the market's needs by transitioning into a clean energy provider through the anticipated acquisition of Energy Harbor and growing its fleet of lower carbon resources. In addition, the company is still well into its share repurchase program and has collectively given back $3.785 billion to shareholders (in terms of value). Vistra's solid performance and commitment to increasing shareholder value make the company one of our top utilities to buy.

As of its last trading date, Vistra's dividend yield works out to 1.90%.

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On the date of publication, Rick Orford did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.